Trend Smasher - Profitable Mechanical Long Term Position Trading

I have been developing this system over the past eight months and have been actively using it for over six with great success. It takes advantage of the long-term trends that many pairs have been experiencing for years now and weathers large retracements quite well, as indicated by the somewhat recent stormy weather in and around the sub-prime time period; this was the first major drawdown that I had ridden it through, and after some tweaking I feel it is finally ready for public release.

Hopefully this will be of use to some of you - I have been asked about this system on and off for months now. I know how scarce the longer-term systems seem to be as everybody is more concerned with getting intraday down pat. To each their own I suppose but, in my opinion, the larger timeframes are much more consistent and much easier to learn for the amateur.

I will attempt to flesh out the system in it's entirety in these first few posts. Please do not post here until I have finished - it will be obvious

The template files have been cleaned of old/unnecessary indicators! Sorry about that...

Setup

Trend Smasher was designed specifically for trading five pairs; AUDUSD, CHFJPY, EURAUD, GBPCHF and GBPJPY. The heart of the system is the Money Flow Index (MFI) indicator, the settings of which have been specifically tweaked for each independent pair. Trend Smasher uses add-ons up to a maximum of three positions per pair (limit to twelve positions total between the five pairs). Each entry should be positioned so that you are risking no more than 1% of your total account equity. This means that if a fully loaded pair (3 positions) turns against you, you will only lose 3% of your account.

You can be holding positions for a month or more at a time (my longest was about 2 months). You can also see periods of extended drawdown before the long-term trend resumes. Get over it! Trust the system - it works!

The templates included in this archive are to be applied to each pair's Daily chart (MetaTrader 4). You also want to include the Average True Range (ATR) with a setting of 20. This number will be used to determine our emergency stop level. For those who are using a platform other than MetaTrader, I have included all pertinent settings below.

AUDUSD
MFI(14) - Add the following levels to the MFI chart: 33 (buy area), 70 & 80 (release positions area)
ATR(20)

CHFJPY
MFI(14) - Add the following levels to the MFI chart: 42 (buy area), 66 & 76 (release positions area)
ATR(20)

EURAUD
This is the only pair in the list that is in an extended downward trend. Because of this all positions will be short.
MFI(11) - Add the following levels to the MFI chart: 72 (sell area), 28 & 18 (release positions area)
ATR(20)

GBPCHF
MFI(14) - Add the following levels to the MFI chart: 31 (buy area), 67 & 77 (release positions area)
ATR(20)

GBPJPY
MFI(11) - Add the following levels to the MFI chart: 30 (buy area), 78 & 88 (release positions area)
ATR(20)

First off, you have to understand that we will only be trading in the direction of the overall trend! Take a look at the weekly & monthly charts of each pair. You will notice that each pair has been in an extended trend for quite a few years. For the record, all pairs are bullish except for EURAUD. This is the only pair that we will be shorting - the rest will all be longs!

Entry

For purposes of this text, I will be assuming a bullish trend pair for all examples.

The basic entry is when the MFI approaches the bottom most line on the chart (the oversold / add-on line). If the MFI bounces off of this line and closes in an up-tick, you open your first position. Alternately, the MFI will pierce below this line. Eventually a day will end in an uptick. At this point you open your first position. The pair is now considered active.

Points to consider:

- Do NOT add-on if the up-tick ends between the two upper lines (or touching the lower of the two). This is a NO ENTRY area.

- As per the core strategy, the maximum open positions per pair is 3. The maximum # of positions in total (spread between the five pairs) is 12.

- I personally also add-on when the MFI goes flat & then up-ticks.

Stop-Loss

Your emergency stop-loss will be 2xATR(20). That is to say, if the ATR(20) is reading 100, your stoploss will be 200 pips away. In the case of GBPJPY the ATR is frequently 200 to 300. This means your stop-loss can be placed as much as 400 to 600 pips away. A lot I know, but consider this: If you position your lot size so that 400 pips = 1% of your account, a month or two later when/if you close out 1500+ pips (a regular occurence with this system) you have just increased your account by 3%. And this is with just one position and only one pair.

Exit

Exit is basically the reverse of the entry. You will notice an upper-most line. When the MFI bounces off of this line & creates a down-tick, or penetrates this line upwards & eventually ticks downward, you release ALL positions that are worth more than 100 pips (option: release all positions over 1xATR). If any are less than 100 (or 1xATR) then hold and wait for a later exit signal.

As with all systems, you WILL experience losses! With this in mind, the system as I use it incorporates the Anti-Hedge strategy as per Jacko's thread here.

In a nutshell, when you are stopped out take note of that price (I put a line in MetaTrader annotated with the exact level & position size so I remember). Once price drops 1xATR below this, I put a buy-stop at the stopped-out level. Treat this like an add-on. If it is far away, then ignore and add-on up to three positions. If it is close, leave one add-on slot open in case it triggers.

Hopefully this pic will help to explain:

This is the system in a nutshell. It is not complex, but I feel that I have not explained it maybe as well as I could have . If you have any questions please let me know either here, or via PM. Alternately I can be reached through Skype under the name SpotFXTrader.

Take care all and I wish you good luck in your trades!!

Questions, Beefs, Criticisms??? Fire away....

Nice work Daemien and thanks for the templates. Could you please attach the MFI as a seperate attachment. I would like to play with it a bit and it would be nice to see the code. Thanks

Cancel that request for the MFI. I found it under indicators, must have missed it the first time, duh! Carry on.

Hi Daemien,

I downloaded your two systems.
Yesterday your 3 amigos performed great in the eu/jp. I am up by more than 90 pipsand still going. Of course it is only one trade but it is a good start.

I am also testing this trend smasher...but it will take some time to get into a trade. The four pairs i am following (I am using North Finance and it does not has CH/JP) are all at the take profit level or very close to it. So will have to wait until the indicator comes back to the go long/short levels.

But I like the same things that you like in it......you do not have to be glued to the screen all day long...just open your positions and relax.....well......at least after you have disgested the drawdown!!!!

I think I have seen you at the Toronto traders meetup site. Are you there? I am part of that group.

Where do you place your Stops on the add-ons?


Since we are a long way from any new entries on these pairs, would you suggest we open positions when we see an add-on entry?

Thanks

Alcastro:

That's great to hear!! Some nice breakouts lately in the wee hours (to me). Wish I could partake...

And yes, that is me at the Toronto Meetup site. I do not reside in Ontario anymore, however, so do not peruse the site much any more.


Billbss:

At the moment all of the pairs are inactive - I took profit on a few of them over the past few weeks. It may be a month or more before pairs become active again - it is definitely worth the wait tho
I would not recommend acting on any of the up-ticks at this time. Once it hits the top, it frequently dives for a bit which gives excellent opportunities for entry.

As for the stop-loss level for add-ons: All stop-losses are at 2xATR for each new position..

I hope this helps!

Good luck in your trades everyone.

D.

Daemien,
How well did you do the 6 months you used this method? Also, should there be a minimum distance from the the last entry before taking an add-on (like 50 or 100, etc.) in order to avoid accumulating positions that are too close in price to each other?

Hi Drayco,

I did very well to be honest - cashed in a few thousand pips in total. Also, the system wasn't designed to worry about minimum distance between add-ons. I just split my total acceptable risk into 3 positions. You will actually get in on the 2nd & 3rd positions at a lower price at times as the first entry is occasionally not quite at the bottom. All at the trader discretion of course, but this is the way I have been using it and quite successfully I might add.

Thanks for the input and I wish you luck in your trades!

D.

Money Flow Index is based off volume. There is no true volume in forex, brokers will simulate volume, but it is not real volume from a market standpoint. This is an issue with any indicator that takes into consideration volume in forex :-( RSI is the closet thing to MFI (MFI is RSI with volume mixed in).

David

Hi David,

Yes, I understand what you are saying, however, the volume in question will be the broker's actual volume, not the entire market's (and not a 'simulation' per se). With this in mind, a large broker should give volume that is based on the general feel of the market - sort of like polling 1000 people in a city of 500,000 to get a gist of what the residents of the whole city feel on a certain topic. I am using InterbankFX and it is working...

Thanks for pointing this out, actually. I had meant to mention this but left it out. It would probably be a good idea to ensure you are using a broker that is large enough to be representative of the market as a whole.

Take care,

D.

I have not had the time to open the templates. Thus My comment is just on this indicator issue. If MFI is similar to RSI, then you do need another filter. Oscilators can at times be useless in a trending market. If your system is trend following, MFI or RSI would not do a good job. If you have jumped into the trend, and is in the right direction, use MA for exit. MA's are going to read the trend end better. Problems with oscilators is that it can't give you a good reading at overbought or oversold areas. Divergence can appear and you are out too soon of your trade. Do a test and see if a filter of ema5 crossing ema13 ( 5/21 etc..Price tends to rebounce from 13 or 21 - it seems ) can give you a better indication when your oscilators are at the oversold/overbought region. When you eventually get a the MA cross to exit, give a glance on your MFI/RSI for confirmation.
Personally I still use indicators. I watch the MTF indicators to be alerted when the market is ranging. Also trending MTF indicators to be alerted when market is trending. Then I use ema ( not ema crossing ) for entry and ema, including ema crossing for exits. ( to simplyfy - MFI shows exit, look to EMA cross for further decision. Ema cross shows exit, look to MFI/RSI for further decision ) I do also short trades in ranging markets with MTF oscilators.

what's the use of the 5 ma on the chart? And can you not find a way to take advantage of the sell-off periods of a pair? What happens when a pair turns to a long-term downtrend? How do you readjust your system? Also, what's the purpose of your Momentum indicator?

thnx

Hi Daemien,

Thanks for taking the time to explain your system. Have you considered other similar pairs, such as NZD/USD?

Ahh shoot; I thought I re-did those templates lol. The momentum and/or any other indicator is unnecessary to be honest as is the 5ma. I was playing with a few different indicators to see how they would fine-tune the draw-down periods. They did not prove useful so I have deleted them.

This system is a TREND FOLLOWING system. If you wish to incorporate a different system to take advantage of the sell-offs then that will be up to you. I would suggest that you trade the two on separate accounts, however (I would suggest this to everybody for all systems - separate accounts for each time-frame / system).

The only time you would need to readjust would be if the lower trend-line is broken (upper for EURAUD) for an extended period of time and with enough force that it is obvious the trend is changing. Then I would stay out of that pair until a new trend emerges. Also the entry / take-profit lines may need to be tweaked occasionally. If you go for more than three months without an entry, volatility may be slightly reduced so I would look at moving the lines in (tightening) accordingly. Same as if they were always exceeded in a big way - I would move them out accordingly.

I will be documenting my positions here for a while. Probably at least a month to go for the first one but I'll put them down here!!

Hope this helps!

D.

i think this strategy looks good, my question is how do you know when the currencty is reversing, most likely when interest rates change in favor of one currencty over the next??....


THANKS!

I really don't track Fundamentals ilcapocamorr. What I have noticed (in backtesting) is that first off, you will notice a reduction in entry times - you may go for an extended period of time without an entry. If you find yourself tightening your entry line to account for this, take notice. Next you will probably notice some trades going to exit that do not have much profit even tho they may have been open for a couple of months.

Lastly, but most importantly, the long-term trendline will be broken. Once this line is significantly broken, stay out of that pair. It may re-establish, or it may be getting set for a reversal.

I hope this helps!

D.